McKay Company sells merchandise with a one-year warranty. In Year 1, sales consisted of 1,200 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in Year 1 and 70% in Year 2. In the Year 1 income statement, McKay should show warranty expense of
A) $3,600
B) $8,400
C) $12,000
D) $0

Question

Quizplus · Accepted Answer

The warranty expense for Year 1 should be based on the total estimated cost of repairs for all units sold, which is 1,200 units x $10 = $12,000. This full amount is recognized as an expense in Year 1, regardless of when the repairs are actually made.

McKay Company Sells Merchandise with a One-Year Warranty